Two new federal tax breaks reward the kind of income that many workers earn on top of their regular pay: tips and overtime. Written into the 2025 tax law, the deductions let eligible workers subtract qualified tip income and qualified overtime pay from their taxable income, lowering the federal tax owed on money that used to be fully taxed. Both are temporary, both are claimed on a new tax form, and both carry income limits that shrink the benefit for higher earners.
How the tips and overtime deductions work
The tips deduction allows eligible workers to subtract up to $25,000 in qualified tip income for the year. The overtime deduction allows a subtraction of up to $12,500 for a single filer, or up to $25,000 for a married couple filing jointly, covering the extra pay earned for hours worked beyond the standard 40-hour week. Both are structured as deductions against income rather than credits, so the value depends on a worker’s tax bracket.
What makes them broadly useful is that they are above-the-line deductions, meaning a worker does not have to itemize to claim them. The Internal Revenue Service has confirmed that the deductions are taken on a new Schedule 1-A, which accompanies the standard Form 1040, so even filers who take the standard deduction can benefit.
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The income limits that phase the deductions out
Neither break is available at every income level. Both the tips and overtime deductions begin to phase out once modified adjusted gross income exceeds $150,000 for a single filer or $300,000 for a married couple filing jointly. Above those points, the maximum amount that can be deducted is gradually reduced, so the full $25,000 in tips or $12,500 in overtime is reserved for workers below the threshold.
The design directs the benefit toward middle- and lower-income earners, the workers most likely to depend on tips or overtime to make ends meet. According to the agency’s guidance on the overtime provision, only the premium portion of overtime pay, the extra amount above a worker’s regular rate, counts toward the deduction, a distinction that affects how much a given paycheck contributes.
Schedule 1-A and how to claim it
Claiming either deduction runs through the new schedule the IRS created specifically for the 2025 tax law. The form and its instructions walk filers through reporting qualified tips and qualified overtime, and they sit within the regular Form 1040 filing rather than requiring a separate return. Workers will still report their wages as usual; the schedule is where the qualifying amounts are separated out and deducted.
Recordkeeping matters here. Because only qualified tips and the premium share of overtime count, keeping pay stubs and employer statements that document those amounts makes it easier to claim the correct figure and to support it if questions arise later. Employers are also adjusting their year-end wage reporting to break out qualifying tips and overtime, which gives filers a reference point when completing the schedule.
A simple example shows the scale. A tipped restaurant worker who reports $15,000 in qualified tips for the year and falls below the income threshold could deduct that full amount, removing it from taxable income and lowering the federal tax owed on it. The same worker who also earned $5,000 in qualifying overtime premium could deduct that too, subject to the separate overtime cap. The deductions do not eliminate payroll taxes such as Social Security and Medicare, which still apply, but they do reduce the federal income tax on the covered pay.
The 2028 sunset
Both deductions are temporary. They apply for tax years 2025 through 2028 and are scheduled to expire after December 31, 2028, unless Congress votes to extend them. That four-year window gives eligible workers a defined stretch to benefit, and it makes the deductions a factor worth accounting for when weighing whether to take on additional overtime shifts or tipped work during those years.
Why it matters for older workers
The deductions are not limited to the young. A growing share of Americans continue working past traditional retirement age, and many do so in tipped roles, such as restaurant and hospitality jobs, or in positions that pay overtime. For an older worker supplementing a fixed income with wages, the ability to shield up to $25,000 in tips or $12,500 in overtime from federal tax can leave more of that pay in hand. Retirees weighing part-time or seasonal work through 2028 have a clear reason to understand which of their earnings qualify, since the tax treatment of that income now depends on how it is classified and how much they earn overall. For someone who has already claimed Social Security, the interaction matters on two fronts: the added wages can affect income taxes, and for those below full retirement age they can also trigger the separate benefit-withholding rules that apply to earnings above an annual limit.
This article was produced with the assistance of artificial intelligence and reviewed by The Financial Wire editorial team.
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Warren Cohen is a finance writer based in Phoenix, Arizona, covering personal finance topics including credit, banking, and beginner investing. He earned his degree in business administration from Arizona State University and began his career working in consumer finance, where he gained direct experience with lending and credit systems. He now writes for personal finance websites and fintech platforms, focusing on clear, practical content that helps readers make informed financial decisions.
